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HAL & GRSE: Defense Monopolies Trading Cheap?
21 Jun
Summary
- Two defense firms, HAL and GRSE, operate with minimal debt.
- HAL boasts a 32% ROCE, while GRSE achieves 43% ROCE.
- Both companies trade at a discount to the sector's median PE.
The Indian defense trade has evolved, with investors now prioritizing strong financial returns over mere order-book growth. Two prominent public sector undertakings, Hindustan Aeronautics (HAL) and Garden Reach Shipbuilders & Engineers (GRSE), exemplify this mature phase.
HAL, a leader in aerospace, designs, builds, and overhauls aircraft. As of June 2026, it boasts a market cap of approximately Rs 2,94,462 cr and a robust order book of Rs 2,54,538 cr. Its financial performance shows sales growth of nearly 8% over five years, with net profit compounding at 23%. Notably, HAL achieves an impressive 32% ROCE, double the industry median, and operates with almost no debt.
GRSE, a key warship builder, has demonstrated rapid growth with sales compounding at 44% over five years. Its operating profit margin is lower than HAL's, but its ROCE stands at an exceptional 43%, driven by a capital-efficient structure utilizing customer advances. GRSE, with a market cap of Rs 32,150 cr, also maintains a nearly debt-free balance sheet.
Both HAL and GRSE currently trade below the sector's high median Price-to-Earnings (PE) ratio of 62x. HAL trades at a PE of 32x, while GRSE is at 43x. This presents them as potentially undervalued monopolies in a maturing defense market, though careful observation of their execution in coming quarters is advised.
